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ISSN: 2146-4138
Department of Economics, Faculty Economic and Business, Universitas Muhammadiyah Riau, Indonesia, 2Department of
Economics, Faculty Economic and Business, Universitas Muhammadiyah Riau, Indonesia, 3Department of Economics, Faculty
Economic and Business, Universitas Muhammadiyah Riau, Indonesia. *Email: m.hidayat@umri.ac.id
ABSTRACT
This study aims to analyze the trends and factors of inequality of inter-regional development in Riau Province period 2011–2016. Analyzer used in
the form of index Theil, Bonet index, and regression of panel data with fix effect model. The analysis result with Theil and Bonet index shows the
decreasing trend of interregional development inequality, and the source of inequality comes from within the development area (within) with the
percentage of 58–68%. The result of fixed effect model regression states that the variable of fiscal decentralization, government expenditure, Human
Development Index, and economic growth have negative and significant relation to inequality. While the variables of natural resource differences
have a positive and statistically insignificant relationship.
Keywords: Inequality Development, Data Panel Regression, Riau
JEL Classifications: D63, O53, R58
1. INTRODUCTION at least the existing problems can be anticipated and utilize its
potential optimally.
The Agenda 2030 for Sustainable Development Goals or SDGs
is a new development agreement that encourages shifting The economy of Riau Province over the last 5 years with the use
changes toward sustainable development based on human rights of GDP data including oil and gas, since 2011 has been growing
and equality to promote social, economic and environmental positively with a fluctuating rate, with the growth rate in 2011
development. SDGs are enforced with universal, integration at 5.57% and in 2015 by 0.22% and the average growth of 2,
and inclusive principles to ensure that no one will be missed 95%. Furthermore, with the use of data without oil and gas Riau
or “No-one Left Behind.” SDGs consist of 17 Goals and 169 economic growth rate in 2011 amounted to 7.76% and continued
targets in order to continue the efforts and achievement of the to fluctuate until 2015 to 2.01% with an average growth of 4.90%.
Millennium Development Goals that ended late in 2015 ago. One Meanwhile, the distribution of Riau Province’s revenue, based
of the global goals compiled in the 2030 sustainable development on Gini index data for 2011–2015 shows that in general in Riau
agenda is to reduce inequality within and among countries (SDGs Province there is a fluctuating change from 0.360 in 2011 to 0.400
Bappenas, 2017). in 2012, in 2013–2014 decreased by a value of 0.37 and 0.35, then
in 2015 again increased from the previous year to 0.36. Changes
Riau Province is one of the areas that serve as the center of trade from year to year still show the happening inequality between
of western Indonesia and the region which is included in the main individuals because the index is still above 0.300 (>0.300).
corridor of the Master Plan for the Acceleration of Economic
Development of Indonesia (MP3EI) Sumatra region. In the Economic development is related to economic growth and is
process of regional development needs to be identified about the accompanied by changes in the distribution of output and economic
potentials and problems of the region. According to that then structure (Nafziger, 2012). Ideally, economic development will
184 International Journal of Economics and Financial Issues | Vol 8 • Issue 5 • 2018
Hidayat, et al.: Inequality of Interregional Development in Riau Indonesia; Panel Data Regression Approach
and Pujiyono (2013); Dewi and Ida (2014); Bakri et al. (2016);
Hidayat and Rahayu (2018) the findings indicate that the long-term According to Kuncoro (2013), the formula states that a perfect
relationship between inequality and growth is naturally positive in equality occurs when the per capita GDP per capita region is equal
the hypothesis of Kuznet and driven primarily by concentrations to the province per capita GRDP. Bonet index value approaching
at each income level. 0 (zero) can mean that the per capita GDP disparity is lower. If
the value is higher, it can be interpreted that the per capita GDP
Maslikhina (2016) states that the occurrence of interregional per capita among high-rise regions or regional economic growth
inequality in Russia during the period 1994–2014 using Theil happens unevenly.
index. Spatial inequality level, tendencies and structural features
in Russia as a whole and in several Russian macro-regions (federal IBi,t = inequality of the district/city; PDRB PCi,t = GRDP per
districts) were identified. The link between interregional inequality capita district/city; PDRB PCRiau,t = GRDP per capita Province.
in Russia and economic growth was identified.
2.1.2. Theil index
Research conducted by Bonet (2006) states that the effect of fiscal Theil index is useful for decomposing total disparities
decentralization on development inequality. The similar findings into Inequality between regions and within regions. The
also found in research by Apriesa and Miyasto (2013) which states calculation of this index has the utility of analyzing geographic
that the effect of fiscal decentralization on income inequality has concentration trends over a given period and can examine a
a positive and insignificant relationship. The research results in more detailed picture of Spatial Inequality. The Theil index
Bakri et al., (2016) declare that fiscal decentralization represented equation is written as follows (Fujita and Hu, 2001; Hidayat,
by balancing funds affects development inequality significantly 2014; Maslikhina, 2016):
and negatively.
n
yi
Based on the research by Hidayat (2014); Mopangga (2014)
stated that the influence of government expenditure and Human
I= ∑y log x
i =1
i (2)
i
Development Index (HDI) on inequality, based on the first
result states that government expenditure and HDI is a source I = Inequality (Theil index); yi = GRDP district/city i/GRDP
of inequality, while the second result states that government Province; xi adalah Population district/city i/Population Province,
expenditure of inequality and HDI can reduce inequality. y
yi log i = Partial Inequality.
According to Sjafrizal (2012) there are several key factors that xi
caused the inequality of development between regions: (1) The The first Theil index values are non-negative; a Theil index of 0
difference in the content of natural resources, (2) differences in indicates perfect equality. Decomposability of overall inequality
demographic conditions, (3) lack of mobility goods and services, into inequality between regions development and inequality within
(4) concentration of economic region activities, (5) development regions development allows us to research spatial structure of
funds allocation among regions. interregional inequality (Equations 3 and 4).
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Hidayat, et al.: Inequality of Interregional Development in Riau Indonesia; Panel Data Regression Approach
4
periods (t = 1,2., T) and N the number of individuals (i = 1,2., N),
yi
I= I 0 + ∑Y I g g yi Yg then with panel data will have total observation units as much as
g =1 Ig =
Y∑
i∈Sg g
log
xi
.............(3)
NT. If the number of time units is the same for each individual,
then the data is called a balanced panel. If otherwise, the number
Xg of time units is different for each individual, then it is called the
unbalanced panel (Baltagi, 2008).
I0 =
4
∑Y g
Y
log
=g
Yg ∑
= y X
i ∑x g i .........(4)
Xg i∈Sg i∈Sg
. In this research, the data used is a balanced panel. Because the
g =1
data obtained from 12 districts/cities observed in the period of
I0 = Inequality between regions development (Between)
4
6 years so obtained 72 observations.
∑ Yg I g
g =1
= Inequality within regions development (Within)
In general, by using panel data, it will generate different intercepts
and slope coefficients on each company and time period.
yi = GDP district i / GDP Province
Therefore, in estimating equation (6) it will be highly dependent
xi = Population district i/Population Province
on the assumptions we make about intercepts, slope coefficients,
2.2. The Definition of Operational Variables and disturbance variables.
Formulation of model analysis of the factors that influence
Inequality of development between regions in Riau Province used In panel data model analysis there are three approaches: Pooled
several variables that can be defined as follows: (1) Inequality of least square (PLS), fixed effect model (FEM), and random effect
development, calculated using Theil index and Bonet index. The model (REM). In this study, the model used only the FEM.
Theil index is used to identify inequality between regions and
the Bonet index is used in the equations of panel data regression 2.5. FEM
model; (2) fiscal decentralization with the measurement of the Problems arising from the use of PLS method is the assumption
degree of fiscal decentralization which is the amount of the that intercepts and coefficients of each variable are the same in
Original Regional Revenue section of all total local revenue each inter-area observed. To take into account, the individuality of
received. The unit of the fiscal decentralization variable is percent; each cross-section unit can be done by making a different intercept
(3) Government expenditure by measuring the ratio of government in each region. In the fixed effects method, dummy variables are
expenditure to GRDP; (4) HDI used in the publication of the added to change the intercept, but other coefficients remain the
Central Bureau of Statistics; (5) Natural Resource Difference same for each observed region.
(SDA) is calculated based on GDP share of mining sector by
district/city; (6) Economic growth, this variable uses GDP data Based on the assumption of the structure of the residual variance-
with constant 2010 prices during the period 2011–2016, the value covariance matrix, in the fixed effects model, there are 3 estimation
of units used in the form of percentages. methods that can be used: (1) Ordinary least square (OLS/LSDV),
if the residual variance-covariance matrix structure is assumed to
2.3. The Determinants of Development Inequality be homoskedastic and no cross-sectional correlation; (2) weighted
Analyzing the factors that influence the inequality between least square, if the structure of the residual variance-covariance
in Riau Province used regression of panel data. The function matrix is assumed to be heteroskedastic and there is no cross-
formed resembles the regression equation used by Cahyono et al. sectional correlation; (3) seemingly uncorrelated regression, if the
(2017); Hidayat (2014); Mopangga (2014) with inter-regional structure of the residual variance-covariance matrix is assumed
Inequality (Ineq) is allegedly influenced by the variables of fiscal to be heteroskedastic and there is a cross-sectional correlation
decentralization (DF), government expenditure (PP), HDI (IPM), (Widarjono, 2013).
natural resource (SDA) and economic growth (LPE). The variables
that have the greatest regression coefficient value, are considered to 2.6. Hypothesis Testing
have an important role in influencing the fluctuation of inequality Before testing hypothesis (F-test, T-test, and R2), then first the
in Riau Province. model is tested to fulfill best linear unbiased estimator requirement
that is tested with classical assumption test, that is autocorrelation
The general form of an equation: test, multicollinearity test and heteroskedasticity test (Widarjono,
2013).
Ineq = {DF, PP, IPM, SDA, LPE} (5)
3. RESULT AND DISCUSSION
Linear equations of panel data regression model:
3.1. Trends Inequality of Development
Ineqit = αit+β1 DFit+β2 PPit+β3 IPMit+β4 SDAit+β5 LPMit εit(6) Theil index calculation results in Figure 1 show that there is
inequality in the development of Riau Province, during the
2.4. Regression Panel Data 2011–2016 which continues to fluctuate. From 2012 until 2016
Pooled data panel is a combination of cross section and series there was a decrease (convergence) from 0.183 to 0.134, this
data. In other words panel data is the data from some of the same indicates the occurrence of equitable regional development.
individuals observed in a certain period of time. If we have T time Furthermore, the decline was due to the economic improvements
186 International Journal of Economics and Financial Issues | Vol 8 • Issue 5 • 2018
Hidayat, et al.: Inequality of Interregional Development in Riau Indonesia; Panel Data Regression Approach
occurring in each region and the period of transition of Figure 1: Trend Theil index - Inequality in Riau Province, 2011–2016
emerging that has been running for more than 10 years. This
phenomenon is in line with the neo-classical hypothesis which
at the beginning of development will be followed by Inequality
and if economic conditions have stabilized, then inequality will
decrease.
Moreover, the region where experiencing an increasing trend Table 1: Trend Bonet index value in Riau Province,
every year is Kuantan Singingi Regency, Bengkalis. Aside from 2011–2016
those two areas, the inequality is experiencing a downward trend. Kabupaten/Kota 2011 2012 2013 2014 2015 2016
The integration of both indexes concludes that the Inequalities in Kuantan Singingi 0.070 0.132 0.146 0.153 0.120 0.136
Riau Province has experienced a downward trend starting from Indragiri Hulu 0.058 0.124 0.138 0.140 0.088 0.093
2012 to 2016. Indragiri Hilir 0.180 0.104 0.078 0.058 0.047 0.026
Pelalawan 0.478 0.399 0.364 0.333 0.304 0.262
Siak 0.607 0.598 0.583 0.554 0.557 0.526
3.2. Econometric Results - Panel Data Regression Kampar 0.218 0.187 0.176 0.185 0.189 0.190
To identify the factors influencing inequality of inter-regional Rokan Hulu 0.371 0.370 0.375 0.383 0.392 0.394
development in Riau Province, it used regression data panel with Bengkalis 0.080 0.152 0.163 0.179 0.206 0.213
FEM approach. Summary of results regression FEM presented in Rokan Hilir 0.152 0.121 0.123 0.123 0.121 0.125
Table 2. Based on the research results obtained by the regression Meranti 0.269 0.179 0.142 0.114 0.076 0.051
Pekanbaru 0.098 0.057 0.057 0.050 0.018 0.002
equation as follows:
Dumai 0.205 0.192 0.197 0.220 0.205 0.177
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Hidayat, et al.: Inequality of Interregional Development in Riau Indonesia; Panel Data Regression Approach
value and a small probability of T of 0.05. This result states that Furthermore, on the basis of the probability that T yields are
government spending is able to reduce the inequality of inter- insignificant, this suggests that the differences in natural resources
regional development that occurred in Riau Province. This is have not had a great effect in the short term on increasing inequality
because the ratio of Government Expenditure to GDP generated in development. Additionally, to anticipate long-term events, local
has a small value which means that ongoing Government governments have a duty to continue to optimize the potential
Expenditure can increase the output of production value or GDP of the economy, so it is not entirely dependent on the results of
of each region, in other words, there is efficiency in government mining both oil and gas and minerals.
expenditure. In line with this, each region in order to be able to
maintain the value of the existing ratio. However, the results According to Table 2, economic growth has a negative and
of research are not in line with Mopangga research (2014) and significant relationship to development inequality. This state shows
Hidayat (2014) states that Government Expenditure is a source the convergent position of inequality. This phenomenon when
of inequality. synchronized with a neo-classical hypothesis or reversed U-curve,
the current position is in the process of decreasing inequality or
Based on the value of coefficient and T probability, the HDI has convergence conditions.
a negative and significant relationship to development inequality.
The situation is caused by the HDI value of each region has no This result is in line with research by Barro (2008); Halter et al.
significant difference. This fact can not be separated from the (2014), that economic growth is negatively related to development
performance of each region that prioritizes human development inequality. Meanwhile, these results are not in line with research
both in terms of planning and implementation at the stage of by Bakri et al. (2016); Dewi and Ida (2014); Frank (2009); Sari
development. and Pujiyono (2013) that economic growth is positively related
to development inequality, in other words, economic growth that
This result is in line with research by Hidayat (2014) which occurs can increase the inequality of development.
resulted that the HDI has a negative effect on development
inequality that occurred in Riau Province. Increasing the 4. CONCLUSION
education of certain levels will improve the quality of human
resources that will impact on the use of physical capital to be The calculation results with Theil index during 2012–2016 began
more efficient and labor will become more productive. Thus, to decrease (convergence), and the source of inequality comes from
the productivity of both physical capital and labor will increase, within the development area (within) with the percentage of 58–
and will eventually increase economic growth and development 68% of total inequality. The Bonet index also shows a downward
gaps may decrease. trend (convergence). Inequality during the same period, and based
on this index the region has the greatest value of Siak, Pelalawan,
The different natural resources that exist in each region is one of Rokan Hulu, Kampar, Dumai, and Indragiri Hilir. The result of
the factors that can increase the inequality of development in Riau FEM regression indicates that the variable of fiscal decentralization
Province. This is based on the value of the coefficient is marked (DF), government expenditure (PP), HDI (IPM), and economic
positive. This result is in accordance with the theory proposed growth (LPE) have a negative and significant correlation.
by Sjafrizal (2012), that one of the factors affecting development Meanwhile, the variable of Natural Resource Difference (SDA)
inequality is the difference in the content of natural resources. has a positive and statistically insignificant relationship.
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